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Avoiding inheritance tax

More people than ever are being affected by inheritance tax (IHT), largely due to the big rise in house prices in recent months. The amount of IHT paid to the government last year rose by 8% as the total levied from estates reached £3.1 billion. How can it be avoided?

The threshold, otherwise known as the nil rate band, is the amount up to which an estate will not have to pay. At the present time the threshold amount is £325,000. If the estate, including any assets held in trust and gifts made within seven years of death, is more than the £325,000 threshold then 40% tax will be due on the amount exceeding that nil rate band.

So that 40% tax rate only applies to any amount exceeding the nil rate band and therefore, if the estate is worth £1m, £675,000 of it will be subjected to 40% tax. There are ways however of getting out of paying such a large sum.

Writing a Will

If you have not already done so then consider writing a Will as this will ensure that your exact wishes are carried out in the way you intend. Because the intestacy rules become relevant in cases where no Will has been left, the law would decide what happens to the estate and the wishes of the deceased would have no influence. Dying intestate could also lead to a possible immediate charge to IHT.

Check whether you would be liable for IHT

If the estate would be worth less than £325,000 there would be no IHT to pay. It is also worth noting that transfers between spouses are exempt from IHT so if the estate passes to the surviving spouse, on their death the exemption from IHT doubles from £325,000 to £650,000.

Using exemptions

It is not commonly known that up to £3,000 can be given away annually which is exempt from IHT, while there is a small gift exemption allowing you to give up to £250 to as many people as you wish to. Other gifts exempt from IHT include wedding gifts of up to £5,000 for parents, £2,500 for grandparents and £1,000 for everyone else.

Make gifts from excess income

Gifts made “outside of income” are also free of IHT. To qualify these gifts would have to be part of normal expenditure, made out of income and so not reduce the standard of living of the person making the gift.

Identify assets to be given away free of Capital Gains Tax

Assets which have fallen in value since the time they were bought can be given away as gifts without attracting capital gains tax.

Life cover

A whole-of-life insurance policy could be used to pay a sum equal to the tax liability and would be put into trust to ensure the money is exempt from IHT and can be used by beneficiaries to pay the tax due.


The whole nil-rate band of £325,000 can be gifted into a discretionary trust which can be repeated every seven years. However anything above the allowance would lead to a lifetime transfer tax of 20%.

Preserve access to income

This relates to gifts “with reservation of benefit” with the rules preventing an asset being given away in a person’s lifetime while allowing continued enjoyment from it. So, for instance a holiday home owned by the parents cannot be given to the children if the parents wish to continue using it.

Business property relief

Some discretionary management services become exempt from IHT after two years, though there are considerable risks associated with this kind of investment.

Gifts to charity

These are exempt from IHT and those giving 10% of their net estate to charity would see the rate of IHT payable reduced to 36% rather than 40%.